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The Un-Ease Of Doing Business After India’s Anti-Reforms

India’s government is proud of its dramatic improvement in the World Bank’s ‘Doing Business’ ranking, jumping another 23 spots to 77th place this year. The reforms the World Bank reviews are quite real, related to the two cities the World Bank uses in its report – Delhi and Mumbai. However, there is a real weakness with the ranking jump.

For every positive reform, the government has lately taken at least a half-step backward in another area.

India’s rankings on the World Bank index haven’t been affected by these steps, mostly because the Modi government’s ‘anti-reforms’ have been on factors not covered by the World Bank.

The World Bank launched the ‘Doing Business’ project in 2002, with the first ranking coming out in 2003. Today, the World Bank uses ten main factors in developing a nation’s ranking, covering 190 nations. These factors include: starting a business; dealing with construction permits; getting electricity; registering property; getting credit; protecting minority investors; paying taxes; trading across borders; enforcing contracts; and resolving insolvency. More detail on how scores are calculated under these ten headers can be found here.

This year, India moved from 100th place up to 77th. This improved ranking was primarily due to major improvements in a few areas, notably ‘dealing with construction permits’, and ‘trading across borders’. The World Bank notes specific reforms under each header that led to the ranking bumps:

However, this improvement in ranking does not appear to be reflected in the sentiments conveyed by business, at least privately.

An entirely different set of factors are cited as proof points that, in some ways, India is becoming a more difficult business environment, particularly for foreign investors.

1. Increases In Customs Duties

While the U.S. ‘war on trade’ gets the most international attention, India has increased customs duties quite a bit, even within the World Bank’s reporting period – notably with the 2018-19 Union Budget, that increased customs duties on nearly 50 product groups. There have been customs duty increases on other product groups more recently. While ‘trading across borders’ is a category in the World Bank report, the covered factors focus on documentation and compliance costs.

"" - Customs duties, which are so meaningful for trade, are not covered. 2. Price Controls

India has expanded price controls on pharmaceuticals, and more recently has expanded price controls to include medical devices – particularly stents and knee replacements joints. Other sectors, too, have fallen under price controls such as credit card transaction fees and airline tickets to smaller cities.

The ability to charge a market-determined price for a good or service is not covered by the World Bank but is important to potential investors.

3. Local Content Rules For Public Procurement

The creation of local content mandates for government procurement predates the Modi government. But the concept has been augmented in recent years, despite India losing a World Trade Organization case to the U.S. on solar power content rules. One key example is a directive from the Prime Minister’s Office in December 2017 to expand local preferences to a wider set of services. Or the Ministry of Heavy Industries’ National Capital Goods Policy, adopted by the cabinet in 2016, calling for 30-40 percent local content for capital goods. Local content mandates are a form of trade barrier yet are not covered under the narrow 'trading across borders' category employed by the World Bank.

4. Snap Regulatory Shifts

As we have repeatedly pointed out, India needs to dramatically strengthen its processes for adopting new business regulations. No government should, of course, negate its ability to change regulation of an industry. But regulatory changes should be done in a thoughtful, deliberative manner that balances multiple stakeholders.

"A 30-day notice and comment period should be required, along with a rigorous cost-benefit analysis to ensure the ‘cure’ is not worse than the ‘illness’."

For instance, in April this year, the Reserve Bank of India adopted a tough new rule under which financial firms must keep data on domestic transactions within India. A few months later, the Finance Ministry’s think tank, National Institute of Public Finance and Policy, through a Working Paper on ‘Data Localisation in India’, raised serious questions about the RBI’s underlying thought on adopting this policy. Ill-conceived regulatory changes do not fall under the World Bank’s scorecard yet are very meaningful for current and potential investors.

The World Bank’s ‘Doing Business’ report is a critically important document. It uses real metrics to rank nations’ business environments. And in the right hands, it becomes a toolkit for reform. However, there are limitations. Some of the most important factors for an investor to consider fall outside the system, such as customs duties, price controls, local content mandates, and slapdash regulatory changes. India’s fast climb in the rankings in recent years is laudable, but the government must ensure that it does not slip on these measures that fall outside the formal rankings.

Richard Rossow is the Wadhwani Chair in U.S. India Policy Studies at The Center for Strategic and International Studies in Washington D.C.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.